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Cryptoassets: are they worth the risk?

Author: ICAEW Insights

Published: 27 Jun 2023

There are many considerations to bear in mind when investing in cryptoassets, so how do they stack up against more traditional investments?

Cameron Parry co-founded one of the first blockchain companies to successfully IPO on a recognised stock market, back in the early days of cryptocurrency. It made him question the nature of both fiat currency and Bitcoin and other emerging cryptocurrencies.

“It was the utopian early stage,” he says. “Everybody thought Bitcoin would smash the use of fiat currency issued by governments, there will never be any financial fraud again, nobody will ever steal from anyone again. From my point of view, I thought: ‘I don’t think you’ve met enough people’.”

Parry ended up going in the completely opposite direction in his future endeavours. His current business, TallyMoney, is a fintech that allows customers to keep their money in a very old, very fungible asset – gold. 

“I’m still a fan of Bitcoin,” he explains. “But with other cryptocurrencies, it’s a misnomer to call them currency at all. There are a handful that are okay because they have some other functional value that they deliver, but out of the 20,000-odd cryptos available now, 19,994 of them would be complete rubbish.”

A lot of cryptocurrencies on the market are essentially Ponzi schemes, he explains, while a handful have some true value to them. “Your money is only as good as the underlying asset that it represents, however it derives value. With fiat currency there’s probably nothing directly under that creating its value. It’s a sort of confidence play.” 

A bit of speculation can be fun, and crypto is extremely speculative, says Parry. It’s better for small amounts of investment, rather than anything major. “I do think people need other alternatives to just building up savings in a bank and fiat currency. That’s certainly what Tally is trying to address. And I do think Bitcoin is a long-term thing that will increase in value over time.” 

Paul Wood FRSA is the founder of C-PAID, a legal service that specialises in contested probate and inheritance disputes across England and Wales. He is also Chief Technology Officer (CTO) for COG, a digital currency with privacy at its heart.

He’s a firm believer in the potential of cryptoassets, but is wary of investing in them without considering their significant risks. “Cryptoassets are known for relatively extreme price volatility. Bitcoin, for instance, has recently broken the $30,000 mark for the second time this year, and other cryptocurrencies (altcoins) have followed by rising similarly. This volatility can lead to significant gains, but also substantial losses.” 

People are often told to HODL (crypto speak for holding/not selling) their crypto investments as a basic strategy to even out their volatility, says Wood. “Plan B’s stock-to-flow model indicates that Bitcoin could reach prices above $100,000 – if this model proves to be true, then HODLing would eventually lead to a more than 3x return.”

But there is also the issue of a lack of consistent regulation around cryptoassets, with rapidly shifting, inconsistent regulations from territory to territory. This uncertainty can impact the value of investments, Wood explains. Accountants for individuals with crypto investments (and the individuals themselves) should keep track of relevant regulations around crypto to understand the client’s responsibilities as a crypto investor.

It’s also important to consider the security of cryptoassets. While the blockchain is relatively secure, it’s not impossible for someone’s crypto wallet to be hacked. Multiple signatory wallets, such as Gnosis Safe, can help with this, requiring multiple signatures to access. “Most crypto exchanges are not regulated in the same way as traditional financial institutions,” says Wood. “This means that if an exchange fails or is hacked, there may be no recourse for investors, particularly on smaller exchanges.”

The crypto market is still relatively small and illiquid compared to traditional financial markets, which makes it more susceptible to manipulation. That can lead to price distortions, presenting both a risk and an opportunity for investors, who should be mentally prepared for rapid highs and lows.

Despite the risks, Wood believes that there are potentially significant rewards from investing in cryptoassets. Traditional financial institutions such as BlackRock, Invesco, and WisdomTree have recently filed for spot Bitcoin ETF applications. This indicates a growing acceptance and legitimisation of cryptoassets. 

“Along with recent moves by world governments to regulate cryptoassets, I am hopeful that this could potentially lead to a more stable and regulated market in the future,” says Wood. “Web3, and the tech around cryptocurrency, presents a massive opportunity to automate and improve financial processes that are currently very slow or cumbersome in traditional finance. The tech is very real, even if the value of cryptoassets can be incredibly speculative.”

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